Aetna warns of earnings shortfall

Insurer feeling effect of rising medical costs

shares fall 18% to $29.80

April 11, 2001|By BLOOMBERG NEWS

HARTFORD, Conn. - Aetna Inc., the biggest U.S. health insurer, said yesterday that its first-quarter profit was "significantly" below analysts' estimates as medical costs rose more than expected. Aetna shares sank 18 percent.

Aetna also said 2001 profit may be lower than the $1.20 to $1.30 a share it previously forecast. The company will take a first-quarter charge of $90 million before taxes for additional medical costs from before the first of this year.

Aetna's costs rose after it changed rules to make it easier for customers to see doctors, resulting in more use of medical services. Doctors and hospitals have also been charging insurers more, and Aetna hasn't raised rates fast enough to keep up.

"They did not leave themselves much room for error," said CIBC World Markets analyst John Szabo. "They're changing their business model and they're underpriced."

Aetna shares fell $6.35 yesterday to close at $29.80.

Health insurers are under pressure to ease restrictions on care as they face class-action lawsuits alleging denial of needed care and as Congress considers legislation to make it harder for them to deny coverage for medical services.

Aetna's problems, though, are specific to the company and don't mean that other health insurers will see unexpected costs, said Merrill Lynch & Co. analyst Roberta Goodman.

Aetna is scheduled to report first-quarter results on May 10.

The announcement is the second in a year in which Aetna has said profit will fall short of expectations. Last year, the company said second-quarter profit missed estimates after medical costs rose more than expected.

Aetna is dropping unprofitable business representing 10 percent of its 19 million customers this year.

The company has been struggling with costs since it purchased money-losing Prudential Health- care for $1 billion in 1999. In December, Aetna said it would shed 5,000 jobs, or about 13 percent of its work force, to cut costs.

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